Markets rebound as Turkey hikes rates amid emerging markets turmoil

Istanbul aggressively increased its overnight lending rate to 12% from 7.75%

Istanbul aggressively increased its overnight lending rate to 12% (GETTY IMAGES)

The latest bold tactics to stem a growing crisis in emerging markets reassured the City today after a dramatic interest rate hike by Turkey’s central bank to defend its currency.

London’s FTSE 100 — down more than 4 per cent in the last week as a succession of blows to emerging economies dented sentiment — recovered its poise, adding 38.72 points to 6611.05.

The gains came after Turkey’s central bank aggressively increased its overnight lending rate to 12 per cent from 7.75 per cent to keep a grip on inflation and stabilise the Turkish lira.

Turkey — gripped by a corruption scandal engulfing the government — is labouring under a big deficit and its currency is the latest to be rocked by the flow of “hot money” out of emerging markets as the US Federal Reserve slows the pace of its money-printing programme.

The nerves began last week when disappointing Chinese manufacturing figures and a run on the Argentinian peso put emerging market currencies under the spotlight.

India responded this week with a surprise rise in interest rates, while Brazil’s central bank has also tightened policy for six meetings in a row and South Africa is now under pressure to raise borrowing costs.

Brazil’s central bank governor Alexandre Tombini warned at Davos of the “vacuum cleaner” of rising interest rates in the developed world, sucking money out of emerging markets.

Deutsche Bank analyst Jim Reid said: “The question remains whether the actions are sufficient enough to stabilize sentiment which has deteriorated sharply in recent weeks.”

Turkey’s actions bolstered the lira by almost 2 per cent and filtered through to global equity markets, lifting Germany’s Dax and France’s CAC 40 by more than 1 per cent following gains in Asia.

Japan’s Nikkei jumped 2.7 per cent and Hong Kong’s Hang Seng added 0.8%. CMC Markets analyst Michael Hewson said: “These measures, it would seem, are calming concerns about a run on emerging market currencies.

“But it also raises serious concerns that the internal shock of these rate hikes will curtail any growth there is in the short term, and in turn hurt profitability of any companies who do business in these markets.”